We want to get hyped about the market and hop into the deep end with both feet, but the NASDAQ keeps repeating the same pattern. It spends some time fiddling around, flirting with resistance and then takes off to an overbought Relative Strength Index (RSI) reading above 70.
It’s like the instructions on the back of your favorite shampoo, wash, rinse, and repeat.
And that’s what we are resigned to doing, repeating the market strategy we’ve employed when the NASDAQ gets ahead of itself, which is to buy the dip when the inevitable profit taking begins.
Monday’s rally took the NASDAQ to an RSI reading of 73.80. As we’ve seen the last few times the index bested the 70 mark, it slid soon afterwards. However, there aren’t any guidelines or hardened rules on how long the NASDAQ can maintain overbought status; meaning more air might still go into the balloon before coming down.
A couple of potential buy the dip points include 14,000 and again at 13,750. Anything below 13,750 could prove to be problematic as it is the rising trendline that connects bottom pivot points dating back to late April. As long as the NASDAQ stays north of the red trendline on the chart below, the NASDAQ should continue to move higher; albeit, in a sputtering stop and go in rush hour traffic manner.
This sort of grinding, churning market requires patience. Wait for the dip, add to your best performing positions, and then do it over again with the caveat that the bottom trendline is not broken.
If we’ve made the correct call and the market pulls back a little, then index investors might wait for the NASDAQ to close in on support around 14,000 and consider adding or building positions in Invesco QQQ Trust (QQQ).
QQQ outperformed SPDR S&P 500 ETF Trust (SPY) by more than 1 percent last week, which confirms our opinion that the market is likely to continue heading higher in the near term.
As expected, Technology dominated our sector/industry performance leaderboard last week, taking hold of eight of the top 10 spots. ARK Next Generation Internet ETF (ARKW) was number one. Unfortunately, all the top performing index/sector exchange-traded funds (ETFs) mirror the NASDAQ and are poised to let some air out.
Sector/industry investors might consider ARKW or any tech ETF on a pullback.
As we stated in our technical market analysis, investors would likely do best adding to their top performing holdings on a dip versus adding anything new.
Once again, the NASDAQ is above 70 for its RSI. As you can see, the index sold off the couple of times the RSI got this high.